Granted, they’ve got a Clifford-sized dog in the hunt, but a new study explains why public employees prefer defined benefit plans over defined contribution plans.
Noting a defined benefits plan’s “higher, more secure retirement income compared to a 401(k)-style plan,” the study from University of California, Berkeley compared CalSTRS pension benefits for California public school teachers.
Unsurprisingly, it finds that switching to an account-based retirement system–such as a 401(k) or cash balance plan–“would sharply reduce the retirement income security of teachers.”
“The study clearly shows that most classroom teaching in California is performed by long-career teachers,” Teachers’ Retirement Board Chair Harry Keiley, said in a statement. “This proves conclusively that the CalSTRS plan design benefits an overwhelming number of lifetime educators who are well-positioned to benefit from a traditional pension.”
No research on taxpayer cost or budget deficits in Sacramento were included in the release.
Tilted “Are California Teachers Better off with a Pension or a 401(k)?,” the study’s findings include:
- For six out of seven teachers, or 86 percent of CalSTRS members, the defined benefit pension provides a greater, more secure retirement income compared to a 401(k)-style plan.
- A typical classroom teacher today can expect to retire from their career at approximately age 61, and nearly half of teachers (49 percent) will retire with 30 or more years of dedicated service.
- Three-quarters of classroom teaching is performed by teachers who will have been covered by CalSTRS for at least 20 years by the time they depart.
- The defined benefit pension becomes more valuable than an idealized 401(k) at age 51 for vested teachers hired before age 35 and earlier for those hired at older ages.
- Eighty-six percent of active teachers in the state will stay in California schools until at least age 51, when DB benefits exceed a well-funded 401(k).
- While four of ten new hires leave before vesting, those who leave represent a small fraction–just six percent of teachers in the classroom today.
- For those who commit to teaching as a profession, the CalSTRS defined benefit plan is a powerful retention tool that serves their retirement needs well, while offering portability throughout the largest education labor market in the U.S.The author and principal investigator of the report notes ancillary stabilizing benefits for the teaching profession as well.
- “The security of a defined benefit plan encourages teachers to stay in the profession despite relatively low salary levels for a degreed career,” said Nari Rhee, PhD, of the UC Berkeley Center for Labor Research and Education. “Yet it has the additional effect of encouraging retirement among older teachers to allow for new ones to enter the field.”
“This study rebuts the myth put forward in several reports which attempt to show that teachers will not benefit, or even vest, in a defined benefit retirement plan,” said CalSTRS Chief Executive Officer Jack Ehnes. “This research clearly shows that, for the overwhelming majority of dedicated educators teaching in California schools, the CalSTRS defined benefit plan exceeds the value of even a generously structured cash balance plan. Since California educators do not receive Social Security benefits for their CalSTRS-covered employment, a modest but secure retirement income is essential for their future.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
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